Over the last 14 years we have seen many reforms in the pensions industry some for better, some for worse. One thing that does stand out is the human nature of wanting something we cannot have which exists in our everyday lives. Making difficult decisions in a timely manner has always been uneasy for us and although we know the right decision, the time taken has meant we have lost some of our options forever.
Pensions has always been a complex matter even for those who we think will understand it, best highlighted in the words of Andy Haldane, Chief Economist of the Bank of England, who commented in 2016, “I consider myself moderately financially literate. Yet I confess to not being able to make the remotest sense of pensions”.
Beginning of a new era – 2006
Pension tax simplification, often simply referred to as “pension simplification” and taking effect from A-day on 6 April 2006 was a policy announced in 2004 to rationalise the tax system as applied to pension schemes. The aim was to reduce the complicated patchwork of legislation built-up by successive administrations which were seen as acting as a barrier to the public when considering retirement planning. The government wanted to encourage retirement provision by simplifying the previous eight tax regimes into one single regime for all individual and occupational pensions. It also introduced caps for tax relief on contributions (the annual allowance) and for the total savings pot before penalties applied (the lifetime allowance),
Furthermore, the doors opened on the ability for UK pension scheme members to transfer, without individual HMRC approval, to an overseas arrangement, known as QROPS. This was an absolute game changer with more and more QROPS transfers taking place over the last decade, offering a number of interesting benefits, particularly for those abroad or retiring there. This wasn’t an act of deliberate generosity, but born out of EU freedoms legislation, which at the time as good European citizens, Parliament embraced.
Freedom from the Conservatives? – 2015
¨Pensions freedoms´ was a result of George Osbourne looking to balance the book between membership appeal and cost to the Treasury. Death benefits in UK money purchase schemes greatly improved, alongside flexible access during one’s lifetime after 55. For those with defined benefit schemes, exchanging an income stream for life for a pot of money that came with all the flexibilities, combined with high transfer values and number of high-profile scheme failures, hardly surprisingly fueled demand. For some, particularly the millions in unfunded public sector schemes, the opportunity to transfer to a more flexible scheme was greatly emphasized, to protect the public purse.
The end is nigh – 2017
With huge numbers transferring to flexible international schemes, often denying the Treasury revenue in taxes, March 2017 saw the introduction of the Overseas Transfer Charge (OTC), imposing a 25% penalty for transferring one’s pension overseas, with specific exceptions. The most valuable of these exceptions is at least until the end of the transition period that we are very rapidly approaching, is for European Economic Area (EEA) residents transferring to EEA schemes.
Death to overseas transfers withing EEA? – 2021
We do not know if this is the end, but it would be prudent not to dismiss it especially when there are very important factors to consider.
Firstly, the European political imperative. When the UK’s transition period ends on midnight 31 December 2020, with the possible removal of one line of the Overseas Transfer Charge regulations, it would be immediately uneconomic for almost all European residents to transfer, effectively removing the option overnight.
Additionally, the rapidly growing concern by politicians that pensions are generous in terms of tax breaks, and that international schemes can and have since the introduction of QROPS, facilitated tax leakage, creates incremental pressure for change.
And finally, potentially impacting any final salary member, possible further changes to restrict or remove what was once the very valuable statutory right to transfer have been hinted at. The proposals though primarily designed to prevent pension scams may have the effect of slowing down the administration of a legitimate transfer.
Now or never?
Is it now or never, for transferring a pension overseas? Of course, history tells us we are unlikely to know until too late, so with a hard Brexit increasingly likely, combined with a COVID induced debt that will need to be dealt with, understanding one’s pension options and making a conscious decision to act or otherwise was never more important. With such a complicated subject and the importance in one´s livelihood it is vital that you seek professional advice before making any decisions.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry.